Foreign Licensing of Your Intellectual Property Rights

When entering a foreign licensing agreement, you need to protect yourself as much as possible from unscrupulous foreign partners and unforeseen events.

Foreign licensing agreements are a great way to expand the market for your intellectual property and to profit from your creation. By partnering with foreign companies who already have a business network in place, all you have to do is give your permission to market your product and then wait for the royalties to start flowing to you.

Because foreign licensing is done in unfamiliar territory (both business and cultural), while the opportunity for profit is enormous, so is the chance for being taken advantage of by unscrupulous partners (either through contract terms or their behavior). You need to choose your business partners wisely, negotiate for important terms in the contract, and monitor the progress of the marketing and use of your product.

What is Foreign Licensing?

When you have created a product or have the exclusive right to a product, trademark, patent, or copyright, you have the right to grant another person or company in another geographical location, to sell, market, or produce your property. In return, you, the property owner, get royalties or other forms of compensation.

Protecting Yourself

In any agreement, not just a foreign licensing contract, the goal is to maximize profits and minimize risk. In a contract, you do this by negotiating for favorable terms, having the other party assume liability for actions outside your control, adding clauses that protect your rights, and similar actions. But what happens when your agreement is with a foreign party?

If you contract with a company in Singapore to market your product but it fails to do so, goes bankrupt, or even harms your interests, if you weren't careful in negotiating the deal, that agreement may not be worth the paper it's written on. You may have to sue them in a foreign court, and even assuming you have the resources to do that, you still may not be able to collect what's owed to you.

Only License to Reputable Companies

Rule one in foreign licensing is to verify the competency of the company with whom you're licensing. Because you likely don't know the company or people personally, you will want to get references and their history with licensing similar products.

Any licensing company should be willing to provide you with a list of clients and possibly even contact information (you may have to get contact info on your own). Make sure you track down as many clients as you can, not just the ones the licensing company gives you contact information for. Get their unadulterated opinion about the company and its timeliness, accounting practices, and service.

If a company is relatively new to the field, there are two considerations. One is that they may not have the resources or business network to properly support your product in that market. Second is that you may be able to wrangle better terms from them as a result. However, the first consideration far outweighs the second—what's the use of great terms if the licensing company can't get you any business? You should be wary of doing business with a foreign company that doesn't have enough experience behind it. Investigate who's in charge and what kind of business connections they have. If the company is led by a former high ranking executive of another licensing company, it may suggest that the new company is well funded and knows what it's doing.

Insist on Certain Terms in the Contract

Once you've determined that a company is reputable, you can move on the negotiating terms for the actual licensing agreement. The contract is the document by which both parties must abide, so you'll need to protect yourself as much as possible. In addition to the general contract terms outlined above, you will want to include terms important to agreements with foreign companies. These terms include:

• Choice of law. Of utmost importance is insisting that the laws of your state (and the United States if applicable) govern should disputes arise. Without such a clause, you may be forced to chase after your partner in whatever country they reside to enforce your rights.
• Jurisdiction. U.S. courts need to have jurisdiction over the people who have a dispute. This means that they have to live in the U.S., be U.S. citizens, or have extensive business ties in the U.S. Foreign companies may or may not have such a business presence here, so you will need to include a clause that explicitly states that the licensing company agrees to the United States exercising jurisdiction over it.
• Arbitration. Lawsuits can take years and burn a great deal of money in attorney and court fees, and may be decided by a judge who is not well-versed in the specifics of your industry. Arbitration is a quicker, more inexpensive form of dispute resolution where a neutral third party is appointed to resolve the dispute. Typically, in licensing agreements, the parties will agree to appoint a neutral third party who has experience dealing with such disputes within the industry. For example, if you're licensing your music rights to an album, the arbitrator may be approved by a legal musical society.
• Advance against royalties. Depending on your industry, an advance on royalties may be appropriate. An advance against royalties is a non-refundable amount that is given by the licensing company up front. You get this advance first and that amount is subtracted from future royalties. For example, if you receive a $10,000 advance, the licensing company won't pay you more royalties until they owe you an amount over $10,000. From that point on, you get paid royalties as sales proceed.
• Method of payment. It's important to get the royalties by wire transfer. Wire transfer helps prevent the foreign partner from giving you the run around ("check's in the mail") and foreign checks can take several months to clear a U.S. bank. Avoid the delay and hassle, and insist on wire transfers for royalty payments.
• Accounting. You should have semi-annual accounting statements from the licensing company. Additionally, you might want to include an auditing provision (giving you the power to have an accountant look at their books to ensure accurate royalty payments). Depending on your bargaining power, you could even try to have the other party pay for the audits—this incentivizes the company to make prompt and accurate payments. The company will likely balk at this proposal because of the cost of audits. Alternatively, you may also include a clause where you will pay for the audit unless there's a discrepancy of more than 10%, in which case the licensing company pays for the audit.
• Release of obligation. In the event that the licensing company is doing a poor job, you should include language that allows you to release that company from licensing your product. The release could be triggered by a certain timeframe (i.e., your product is not being sold in the market within 60 days) or other circumstances you find relevant.
• Termination. In addition to the release clause, you should probably specify a definite term after which the contract ends. In this way, you aren't locked into doing business with one company and you can renegotiate terms every few years as necessary.